The World Trade Organization’s dispute system was once lauded as an important advancement in trade law enforcement. Now it appears that the system’s legal backbone has been broken.
If the dispute system cannot be salvaged from the current crisis, it’s worth asking: what do we lose?
Answering that question means putting politics aside an taking a careful look at the data. Social scientists have investigated dispute settlement at great length. The findings suggest that, for all its difficulties, the WTO’s rule of law is the preferable to settling disagreements via unilateral retaliation.
Direct impacts
The WTO’s Dispute Settlement Understanding was a victory for those who thought that old GATT system lacked legal bite. But, roughly 25 years after the DSU’s formation, what do we know about dispute settlement’s impact?
There are a couple of ways to measure how trade disputes matter. The most obvious is whether litigation affects trade flows among members. After all, if dispute settlement works according to plan, members should dismantle their WTO-illegal trade barriers. That should lead to an increase in trade.
It turns out the evidence is highly mixed. There’s no systematic evidence that disputes increase trade flows across the membership, on average. Instead, trade gains vary by legal outcome and by disputed issue area.
Why don’t disputes have a larger effect on trade?
First, many disputes don’t involve high trade volumes. The median dispute involves roughly $60 million in bilateral trade – not a tremendous amount in the grand scheme of things.
Second, and perhaps more compelling, it’s possible that countries don’t always comply with dispute rulings.
Compliance is arguably the most important measure of dispute settlement’s impact. In recent work, we looked at whether countries tear down their discriminatory trade barriers in the wake of adverse rulings.
Respondents lose (some portion of) panel rulings about 90 percent of the time. That means governments face frequent demands to amend – or dismantle – their policies. How often do they do so? The best available evidence says that members comply about two-thirds of the time.
That 66 percent compliance rate is either woefully low or surprisingly high depending on one’s point of view.
It’s low if we compare it to domestic legal systems, where countries would be in serious trouble if domestic courts were complied with only 66 percent of the time.
But international law is different. International organizations are plagued by weak enforcement mechanisms and rely heavily on willful compliance by governments. Viewed in that light, it’s remarkable that members dismantle their WTO-illegal barriers so often. After all, having to roll back trade barriers is politically costly.
Given the litany of reasons government may ignore international legal rulings, it’s important to note that dispute decisions do affect policy in the majority of cases.
Indirect impacts
There are a variety of other ways in which dispute settlement might matter. However, those impacts are much harder to measure.
For one thing, researchers can’t measure compliance with bargained settlements.
WTO disputes end in mutually agreeable solutions about one-third of the time. But, for important reasons, those settlements are not public documents. This means studying the impact of settlement is virtually impossible. There’s no way to correlate ex post policy with the terms of a settlement hidden from public view.
In addition, we don’t know the extent to which the WTO’s legal rulings deter future violations.
Legal systems aren’t just interested in punishing today’s violations. They also want to reduce the likelihood violations occur down the road.
Unfortunately, measuring deterrence is exceedingly difficult. What we do know is that financial markets sometimes act as if WTO rulings have knock-on effects. For example, when Canada’s feed-in tariffs were struck down in DS 426, India’s publicly traded solar panel manufacturers – protected by similar policies – took a stock price hit.
Still, it isn’t clear whether countries ever avoid new protectionist barriers because of past WTO decisions. Knowing that requires more information about the initial decision to protect domestic industries.
What it all means
The debates over dispute settlement involve a lot of complicated issues. For example, the U.S. has complained of legal overreach, and it’s true that a form of de facto precedent has emerged at the WTO. In addition, the WTO itself encourages states to settle disputes “out of court.” Yet, there’s some evidence that third parties spoil settlement.
This all means that understanding the value of dispute settlement is complicated and remains a work in progress.
What’s needed to fill these gaps is a closer conversation between researchers and policymakers.
In the interim, a cursory glance at current events suggest that a rules-based system is better than an economic Wild West. If you still aren’t convinced, consider one final thing: dispute settlement isn’t just about punishment. It’s also about limiting punishment. The whole point of legalized dispute resolution is taking vigilantism out of the global economy and limiting the kind of unilateral retaliation that causes trade wars. For that reason alone, having a legal system to limit violations – and limit reactions to those violations – is worth keeping around.
Jeffrey Kucik is an Associate Professor in the School of Government and Public Policy and the James E. Rogers College of Law (by courtesy) at the University of Arizona. He is the creator and author of www.trademonitoronline.com.
Lauren Peritz is an Assistant Professor in the Department of Political Science at the University of California, Davis.
